Doubling in demand to short Chinese stocks listed in US

Short selling in US listed Chinese stocks has skyrocketed to 6% of the total shares, amid high profile accounting scandals and some recent IPOs at eye-watering multiples. Back in January The Economist established where the China pessimists were mainly located. Back then it seemed the US funds were anticipating a China slow down, with short interest averaging 3% of total Chinese ADRs as opposed to the hedge funds in Hong Kong, where an average of only 1% of the total shares were out on loan. While short interest in Chinese listed stocks in Hong Kong has remained fairly flat at around, it has doubled in the ADRs of Chinese companies listed in the US. We highlight some of the most shorted US and HK listed Chinese companies and separately, look at short interest in some stocks announcing earnings next week.

Small cap, A Power Energy Generation Systems Ltd (NASDAQ:APWR) tops the list of the most shorted US listed Chinese stocks with 32% of its total shares outstanding on loan. This is down from a staggering 50% back in February and represents almost all of the lendable supply of shares. It would be hard to short more of this Chinese onsite micro-power distributor, which has seen its share price plummet from USD 20 back in the middle of 2009 to just USD 4 today.

The shares in Chinese control technologies provider, Hollysis (NASDAQ:HOLI) have tumbled over the past year shrinking its market cap to USD 500m. Short interest has ramped up this year from 7% to 17% of the total shares, with virtually all the lendable supply of shares out on loan. Demand to borrow may be inflated due to its convertible bond, although there appears to be significant directional short selling in this stock, which sees almost all the lendable supply of shares out on loan.

Harbin Electric Inc (NASDAQ: HRBN) is the Chinese supplier of electric motors which appears to be facing similar challenges afflicting its better known US competitor, Tesla Motors. Short interest has gained momentum since December last year, rising from 2% to 14% of the total shares, well ahead of the shares falling 25% to USD 16 in April.
 

Sino-Forest (TRE) is the latest Chinese stock to disappoint investors. Shares in the Canadian listed timber firm plummeted prior to being suspended last Thursday by the Toronto Stock Exchange following accounting accusations about its timber production and land holdings in China. Short sellers have questioned the viability of this company, having almost doubled their positions to a substantial 33% of the total shares in just over a month. Almost all the lendable supply is out on loan.

Bloomberg highlighted investor frustration in a number of Chinese stocks which were heavily shorted prior to the ADRs being suspended. This included China MediaExpress, which is being delisted from the NASDAQ after their auditors resigned. Shares in China Shen Zhou (AMEX:SHZ) declined 60% since January after its CFO resigned. Shorts have covered their positions since late April from 8% to 5% of the total shares, yet despite this, all the supply of shares is out on loan. Shares in Longtop (NYSE:LFT) have collapsed almost 50% since April before trading was halted, leaving short sellers stranded holding over 30% of the total shares.

We have written (click here) on recent Chinese floats Renren (NYSE:RNN) and YouKu (NYSE:YOUKU) which see significant demand to borrow the shares, with short interest standing at 2% and 6% respectively. Other names previously mentioned and the target of short sellers due to corporate governance issues were DuoYuan Global Water (NYSE:DGW) (suspended) and DuoYuan Printing (DYNP). There is not much activity in either after their travails.

Hong Kong

While the average short interest in Chinese stocks listed in Hong Kong is only 1.8% there are a number of outliers to this trend. The most heavily shorted stock is Aluminium Corporation of China Ltd (HKG:2600). Shorts have not been deterred by the falling share price, having increased positions from 8% to 15% of total shares outstanding on loan. Sportswear brand, Li Ning Co Ltd (KHG:2331) has run into trouble with its strategy of challenging the dominance of foreign brands in the domestic market, with the unexpected departure of three senior executives. Short interest has increased over the year but has jumped from 9% to 11% in the last two weeks. The worry that the slowing domestic economy may hit demand growth for imported commodities may be filtering through to individual stocks such as China Cosco Holdings Co Ltd (HKG:1919), the marine cargo transportation provider. Investors are increasingly bearish towards this stock with short interest having almost doubled from 6% to 11% since December.

Bottom line

The over-arching question some investors must be asking is whether the US listing requirements for overseas companies match the stringent regime in Hong Kong and what changes need to be made. In these circumstances, the movements in short interest in these stocks was a lead indicator of troubles ahead.

Upcoming earnings

This week, we expect Ciena Corp (NASDAQ:CIEN) to report Q2 2011 earnings. The shares are trading in its upper quartile range, whilst recent short covering has reduced short interest from 26% to 20% of total shares since April. Retailer, Talbots Inc (NYSE:TLB), is due to report Q1 2011 earnings. It shares reached new annuals lows last week as we see a quarter of total shares outstanding on loan.